Decent gains of between 0.6 to 0.8 per cent on Friday night meant that US stocks finished the week 0.9 per cent higher. Not bad for a country on the brink of default. In fact, there is a clear divergence between the alarmism of global policy makers and the market reaction. So far in this crisis US stocks are down only 1.3 per cent and US Treasury yields – apart from some very short-term paper – are lower. Recall that the US Treasury reckon it will have only $30 billion in the kitty to pay bills by Thursday and that will only last another week or two.
The market is of course telling us it doesn’t expect a default. At worst, the market expects there could be a delay in paying some Treasury bills. But then it’s not like you earn anything investing in Treasury bills anyway, so I don’t see the issue here. If you are giving the US Treasury money for free, what difference does it make if it pays you back a few days late? For most, it would probably only delay an inevitable rollover into the next few weeks (or month or so) anyway. So it doesn’t make a difference clearly. Yet as it stands, no deal has yet been cut and apparently this means that unless a deal is struck over the next few days, the world will be thrown into financial armageddon.
There is cause for optimism though – in the US Senate at least. The House not so much; it’s having a tea party (insert audio of the Mad Hatter's song). Anyway, Senate Majority Leader Harry Reid (Democrat) said on Sunday after having met with Senate Republican leaders, “I'm confident Republicans will allow the government to open and extend the ability of this country to pay its bills." This is obviously going to be the key focus for markets this week – whether that happens or not. However, given the difficulty both sides are having negotiating, I don’t think investors should be surprised if the US government doesn’t actually come to a deal by Thursday.
Firstly, remember it has another week or two after that deadline before it runs out of money and no doubt the Treasury has a few more billion up its sleeve to last another week or two after that. Secondly, we can’t forget the US Congress has a penchant for high drama – and so far markets are just not taking them seriously enough. If it comes to a deal before Thursday, then the next time it comes up to the debt limit, markets will likely rally! I’m joking, obviously. My point is that if this crisis passes with nothing, then it loses all meaning – it becomes an empty threat, tactically pointless. So with that in mind, I think there is a high probability that the Thursday deadline won’t be met.
Now outside of that, there isn’t a lot happening in the US. Very little data and certainly nothing that will change anyone’s macro view (stuff like the Empire State manufacturing index, the Philly Fed index, housing starts). There is a barrage of Fed speak again – William Dudley, Richard Fisher, Esther George, Charles Evans, Narayana Kocherlakota – which, given that no one knows the timing of the taper now, will be closely watched. There will also be a run of Chinese data – inflation today and GDP, industrial production, retail sales and investment (on Friday) is well worth watching.
Similarly, there isn’t a great deal of news flow this week for Australia. Probably the key piece of news this week will be home loans data on Monday at 1130 AEDT. This is obviously a key input to see if consumers have recovered enough confidence to borrow. So far the signs have been good – the housing market appears to be on the rebound finally, after a hiatus for the last two years or so – and of course we know auction clearance rates have been high.
Otherwise on Tuesday car sales are out, as well as the Reserve Bank’s minutes. I doubt we will learn much in these minutes, to be frank. The bank has been very clear about its concerns regarding the exchange rate – when it was 89 US cents, so we can safely assume that at 94 (0.942 now from 0.9468 on Friday afternoon) it is even more concerned. It is less concerned about a housing bubble. It’s with that in mind that I think the bank, while it has an exchange rate target, will cut when it can and we know it has a well flagged easing bias. Maybe Reserve Bank governor Glenn Stevens will give us an update when we speaks on Friday 1200 AEDT.
Have a great week…